Goldman, Gold, And Dollar's Influence on The Price of The Yellow Metal

When gold declined last Friday we were not caught by surprise and neither
were our Subscribers. Based on our technical analysis, we gave you a heads
up two weeks ago when we said that gold was ready for a decline before resuming
its upward climb. But sometimes news can rattle the market, which is what happened
Friday when gold hit an air pocket and dove $25 in a few minutes to move very
close (or slightly below) the levels mentioned in our Friday update.

While it is always the sell order (or rather a large amount of them) that
causes a dramatic move, and one should not automatically assume that one single
event is responsible for it (without giving it a second thought), in this case
it seems that the immediate cause for the decline was news of the Securities
and Exchange Commission's (S.E.C.) civil fraud charges against Goldman Sachs.

You might be scratching your head wondering why such an event would affect
the price of gold? Intuitively, one would reason that since gold is a hedge
against financial-sector risk, gold would shoot up in reaction to such news
instead of diving down. In times of uncertainty, investors turn to gold as
a hedge against inflation and unforeseen crisis, gold being one of the very
few asset classes that is not someone else's liability. But Friday, investors
lost their risk appetite and dumped all commodities in favor of the U.S. dollar.

The full story of what happened with Goldman Sachs is complex and the media
hasn't done a great job explaining it. In a nutshell, the S.E.C. is charging
that Goldman created and marketed securities based on a group of subprime mortgages
that were deliberately designed to fail.

Why would they want to do something like that?

Obviously somebody was going to make a lot of money from it. That someone
- as it is expected - was the super-savvy hedge fund firm of Paulson & Co,
the world's third largest hedge fund. According to the S.E.C., Goldman failed
to disclose to investors the role played by Paulson & Co in the construction
and design of that particular security. Paulson & Co helped choose securities
for this investment and then wagered (successfully) that it would fail. In
other words, Paulson & Co, worked with Goldman to pick the assets that
went into the security, allegedly choosing the riskiest. Then, Goldman sold
these securities to its clients, who readily bought because of their triple-A
rating. (Someone should look into how they got this triple-A rating.) Mr. Paulson
then placed bets that the security would lose value.

We took a look at the Goldman Sachs website, specifically at a section called
their "business principles." There were 14 listed. Let's look at the first
and the last. The first says: "Our clients' interests always come first." (I
guess they meant the BIG client, like Paulson& Co) The last principle says: "Integrity
and honesty are at the heart of our business." (No need to comment on that
one.)

Paulson & Co said its role in helping to design a mortgage-linked deal
sold by Goldman Sachs Group Inc. was "appropriate and conducted in good faith," according
to a letter sent to investors.

If you're still wondering what all this has to do with the price of gold,
we're now getting to that part. Obviously anyone sharp enough to see the coming
of the subprime fiasco and intelligent enough to make billions of dollars from
it is one savvy investor. Further proof for us at Sunshine Profits that John
Paulson is one smart dude is the fact that Paulson's firm is one of the world's
largest investors in gold. His holdings of the SPDR Gold Trust (GLD), valued
at $3.6 billion, make his firm the largest holder of that ETF -- representing
15% of his portfolio. Among his other top ten disclosed positions is the AngloGold
Ashanti LTD (NYSE:AU) gold mining stock. His ownership of that stock totals
$1.7 billion and represents around 7% of his holdings.

Even though Paulson & Co. was not charged by the S.E.C., the sheer mention
of the firm in connection with the suit against Goldman was taken to be negative
news for gold.

The thinking might have been that investors in Paulson's hedge fund may rush
to redeem their shares in the fund, thereby forcing it to sell some of its
gold holdings. That argument does not make sense. First of all, most hedge
funds require at least a 30-day notice to cash out. Even if the deal Paulson
made wasn't exactly ethical, it still made his investors a spectacular bundle
of money and the S.E.C. did not press any charges against him. So where is
the risk for his investors?

Even if, for the sake of argument, many investors would rush to the exit doors
to redeem their shares in Paulson's hedge fund, and as a result the fund would
have to sell some of its gold holdings, how would that affect the precious
metals market?

Writing this week for Marketwatch, Mark
Hulbert crunched some figures.

"For argument's sake, let's assume that Paulson's gold holdings, both physical
gold as well as shares of gold mining companies, represent a total of about
30% of his overall investments and are worth around $10 billion. Let's further
assume that 10% of the investors in Paulson's fund suddenly get cold feet
and ask for their money back.

Given my assumptions, that would lead to the sale of $1 billion of gold
and gold shares -- or 0.37% of the total worldwide market cap of gold mining
companies and gold owned by ETFs. Not exactly good news, but not particularly
momentous, either -- especially since hedge fund investors typically can't
get their money back immediately but have to wait a while after indicating
their intent to redeem."

Even though it seems that the Goldman-linked SEC case caused the price of
gold to dive last Friday, we believe it was only a catalyst to the technical
correction that we predicted was coming in any case. We wrote in the
last two Premium Updates that gold, which rallied to a four-month high
of $1,170.70 on April 12, was poised for a technical correction. So, it seems
to us that the Goldman news most likely just triggered an exit opportunity
for short-term traders to lock in profits. If we look at the large picture,
a blip like the Goldman Sachs story won't make a difference in the long-term
inevitability of the gold bull market.

We found it interesting that upon hearing the news about Goldman Sachs, nervous
investors would dump gold for dollars. We have written in previous
Premium Updates about the mountain of debt accrued by the U.S. government
and what it will mean for the long-term value of the U.S. dollar.

Speaking of the U.S. dollar, let's take a look at the current situation in
the USD Index (charts courtesy by http://stockcharts.com.)

In our previous report we wrote the following:

There has been only a very small reaction to the USD weakness. Gold has
recently been consolidating and this means that these may move a bit lower
before the bottom is in. This holds true for silver and other equities as
well.

We felt that the USD would move slightly higher but that its weakness would
cause relatively little downward pressure on the precious metals sector. This
is exactly what happened over the past seven days as the USD approached its
March highs but gold did not respond by moving close to its recent lows. The
same held true for silver. So, although the recent decline might have appeared
huge on a day-to-day basis, taking a broader perspective reveals that on a
relative basis very little downward movement occurred in the PM markets.

This is a very positive sign for PM's as the USD is one of the key
drivers for PM prices and the rally seen this week had little negative
effect on PM's. We are bullish at present although we do not expect immediate
upward movement in gold, silver and mining stocks.

The USD is approaching a resistance level at the 50% Fibonacci retracement
of the 2009 decline as well as a previous stop. This may hold this rally in
check. However, the PM markets remain strong. Even if we do see another increase
(which we don't expect at this point), say to the 83 level, though unlikely,
we do not expect a severe decline in PM prices. The USD will eventually, in
our view, move lower. This will in turn cause the PM prices to rise strongly
as there will be no downward pressure from the USD when its decline begins.
Whether this happens in one week or two is unclear at this time but we believe
that the decline in the USD is in the cards sooner or later.

Summing up, based on the analysis of the U.S. Dollar Index, we remain
bullish on gold, silver, and mining stocks in the medium term.

The USD rally is likely to slow and soon come to an end. Gold, silver, and
mining stocks, having shown strength during the recent USD rise, are poised
to surge upward once the current USD rally ends. Should the USD rally continue
in the coming week, expect continued minimal declines in the PM sector as its
strength continues to hold prices in patterns similar to recent weeks.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

Disclaimer: All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates
only. As such, it may prove wrong and be a subject to change without notice.
Opinions and analyses were based on data available to authors of respective
essays at the time of writing. Although the information provided above is
based on careful research and sources that are believed to be accurate, Przemyslaw
Radomski, CFA and his associates do not guarantee the accuracy or thoroughness
of the data or information reported. The opinions published above are neither
an offer nor a recommendation to purchase or sell any securities. Mr. Radomski
is not a Registered Securities Advisor. By reading Przemyslaw Radomski's,
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Investing, trading and speculation in any financial markets may involve high
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as well as members of their families may have a short or long position in
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